Question

Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt-equity ratio of .40, but the industry target debt-equity ratio is .45. The industry average beta is 1.20. The market risk premium is 6.8 percent and the risk-free rate is 4.4 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 22 percent. The project requires an initial outlay of $820,000 and is expected to result in a $100,000 cash inflow at the end of the first year. The project will be financed at the company’s target debt-equity ratio. Annual cash flows from the project will grow at a constant rate of 4 percent until the end of the fifth year and remain constant forever thereafter. Calculate the NPV of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer #1

Blue Angel, Inc., a private firm in the holiday gift industry,
is considering a new project. The company currently has a target
debt–equity ratio of .30, but the industry target debt–equity ratio
is .25. The industry average beta is 1.40. The market risk premium
is 8 percent, and the risk-free rate is 6 percent. Assume all
companies in this industry can issue debt at the risk-free rate.
The corporate tax rate is 35 percent. The project requires an
initial outlay...

Blue Angel, Inc., a private firm in the holiday gift industry,
is considering a new project. The company currently has a target
debt–equity ratio of .40, but the industry target debt–equity ratio
is .35. The industry average beta is 1.20. The market risk premium
is 8 percent, and the risk-free rate is 6 percent. Assume all
companies in this industry can issue debt at the risk-free rate.
The corporate tax rate is 40 percent. The project requires an
initial outlay...

Blue Angel, Inc., a private firm in the holiday gift industry,
is considering a new project. The company currently has a target
debt–equity ratio of .30, but the industry target debt–equity ratio
is .25. The industry average beta is 1.40. The market risk premium
is 8 percent, and the risk-free rate is 6 percent. Assume all
companies in this industry can issue debt at the risk-free rate.
The corporate tax rate is 35 percent. The project requires an
initial outlay...

Blue Angel, Inc., a private firm in the holiday gift industry,
is considering a new project. The company currently has a target
debt–equity ratio of .45, but the industry target debt–equity ratio
is .40. The industry average beta is 1.30. The market risk premium
is 7 percent, and the risk-free rate is 5 percent. Assume all
companies in this industry can issue debt at the risk-free rate.
The corporate tax rate is 34 percent. The project requires an
initial outlay...

Blue Angel, Inc., a private firm in the holiday gift industry,
is considering a new project. The company currently has a target
debt-equity ratio of .70, but the industry target debt-equity ratio
is .75. The industry average beta is 1.10. The market risk premium
is 6.5 percent and the risk-free rate is 4.5 percent. Assume all
companies in this industry can issue debt at the risk-free rate.
The corporate tax rate is 21 percent. The project requires an
initial outlay...

Doubleday Brewery is considering a new project.
The company currently has a target debt–equity ratio of .40, but
the industry target debt–equity ratio is .25. The industry average
beta is 1.08. The market risk premium is 8 percent, and the
(systematic) risk-free rate is 2.4 percent.
Assume all companies in this industry can issue debt at the
risk-free rate. The corporate tax rate is 21 percent. The project
will be financed at Doubleday’s target debt–equity ratio. The
project requires an...

Suppose that Ret is considering the acquisition of another firm
in its industry for $100 million. The acquisition is expected to
increase Ret’s free cash flow by $5 million the first year, and
this contribution is expected to grow at a rate of 3% every year
thereafter. Ret currently maintains a debt to equity ratio of 1,
its corporate tax rate is 21%, its cost of debt rD is 6%, and its
cost of equity rE is 10%. Ret will...

(1)You are thinking of starting a new project. You do a
cash-flow analysis and estimate that the project will give you a
free cash flow of $50M in one year and the free cash flows will
grow at a rate of 2% per year perpetually.
The equity beta for a firm
similar to your proposed project is 1.4. This similar firm has
$300M of risk-free debt outstanding and has 300 million shares,
each valued at $5 each. It also has...

Suppose that Rose Industries is considering the acquisition of
another firm in its industry for $100 million. The acquisition is
expected to increase Rose's free cash flow by $5 million the firs
year, and this contribution is expected to grow at a rate of 3%
every year there after. Rose currently maintains a debt to equity
ratio of 1, its marginal tax rate is 40%, its cost of debt rD is
6%, and its cost of equity rE is 10%....

Comedy, Inc. has a debt-equity ratio of 0.54. The firm is
analyzing a new project which requires an initial cash outlay of
$430,000 for equipment. The flotation cost is 8.6 percent for
equity and 5 percent for debt. What is the initial cost of the
project including the flotation costs?

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